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Explain the meaning of the term ‘unrealized profits’ in relation to the transfer of assets

1. IBM Limited acquired a 20% share in ABC Limited for $18,000. IBM Limited has no other investments. At the date on which it became an associate, ABC Limited had the following equity: Share capital $50,000 Retained earnings $40,000 At the end of the financial year following the investment, ABC Limited generated a profit of $6,000. After applying the equity method of accounting, IBM Limited will have the following carrying amount for the investment. A. $19,200 B. $18,000 C. $16,800 D. $9,200 2. In Australia, an entity that has users who are not in a position to demand reports tailored to their particular information needs must prepare A. Management accounts only B. Short-form financial statements only C. Purpose financial statements D. General purpose financial statements. 3. Consolidation worksheet adjusting entries are recorded A. in the general ledger of the parent entity B. in the general ledger of the subsidiary C. in the consolidation working papers D. none of the above 4. In accordance with the quantitative guidelines in AASB 1031 Materiality, to determine if the omission of an item of Equipment worth $600 000 is material, it should be compared with the more appropriate base amount of A. Total Non-Current Assets B. Equity C. Total Assets D. Plant and Equipment 5. Assets and liabilities, and income and expenses may be off-set if A. they are financial assets and liabilities B. they are in respect of borrowing and lending activities such as interest revenue and interest expense C. there is a legal right of set-off and it is permitted by a standard D. there is no tax effect 6. The John Ltd acquired Jacky Ltd, when the carrying amount of Jacky Ltd.’s plant was $100,000. The fair value of the plant at the date of acquisition was $130,000. Company tax rate is 30%. The amount to be recognised in the business combination valuation reserve is A. $130,000 B. $30,000 C. $21,000 D. $7,000 7. Which of the following is NOT an enhancing qualitative characteristic A. Comparability B. Understandability C. Materiality D. Timeliness 8. When a non-current asset that has not previously been revalued is revalued upwards the net gain is recognised in: (PLEASE REPHRASE THIS QUESTION) A. Asset revaluation surplus B. Other comprehensive income C. Profit and loss D. None of the above 9. Australian Accounting Standards Board (AASB) functions are to A. Administer the Corporations Act B. Prepare and issue accounting standards C. Oversee compliance with accounting standards D. None of the above 10. A single set of financial statements, that combines the separate sets of financial statements for a number of entities, which are managed as a single economic entity, is known as A. a concise financial report B. a condensed financial report C. new entity financial statements D. consolidated financial statements Question 1 (10 marks) On 1 July 2014, White Ltd purchased all the shares in Blue Ltd for $2,700,000. At this date, the shareholders’ equity of Blue Ltd consisted of: $ Issued capital 1,000,000 Retained earnings 1,360,000 On the date of acquisition, the carrying amounts of the identifiable net assets in Blue Ltd equal to their fair value except for the land which is undervalued by $260,000 and inventory undervalued by $55,000. The directors of White Ltd believe that the goodwill relating to the acquisition of Blue Ltd has been impaired by $20,000 during the year ended 30 June 2015. Assume the company income tax rate is 30%. Required: (a) Prepare the acquisition analysis at 1 July 2014; and (b) Consolidation worksheet entries at 30 June 2015 for the preparation of the consolidated financial statements of White Ltd group. Question 2 (10 marks) Spoke Ltd is a wholly owned subsidiary of Wheel Ltd. The transactions for the period ending 30 June 2013 are shown below: 1. During the accounting period, Spoke Ltd paid management fees of $18 000 to Wheel Ltd. 2. Wheel Ltd lent $13 000 to Spoke Ltd during the period. 3. Wheel Ltd sold inventory to Spoke Ltd for $60 000 during the period. This inventory had originally cost Wheel Ltd $40 000. Spoke Ltd sold 75% of this inventory during the period to parties external to the group for $50 000. The remaining 25% is still held by Spoke Ltd at the end of the period. The tax rate is assumed to be 30%. 4. On 1/7/2012, Spoke sold an equipment to Wheel for $8 000 while the carrying amount of the equipment was $6 000. Spoke depreciated the equipment at 10% but Wheel will depreciate the asset at 20% per year. Required: Prepare the consolidation elimination journal entries for the year ended 30 June 2013. Question 3 (10 marks) On 1 July 2019, Tom Ltd acquired 80% of the issued shares of Dick Ltd for $165 000. At this date, the equity of Lorikeet Ltd was: At acquisition date all the identifiable assets and liabilities of Dick Ltd were recorded at amounts equal to fair value. At 30 June 2021, the equity of Dick Ltd consisted of: During the 2020–21 year Lorikeet Ltd recorded a profit of $15 000. Required Prepare the consolidated worksheet entries at 30 June 2021 for Tom Ltd assuming: At 1 July 2019, the fair value of the non-controlling interest was $40 000 and Tom Ltd adopts the partial goodwill method. (Not consistent – need to see the solution please) Question 4 Jacky Ltd commences operations on 1 July 2013, and on this date, acquires two items of plant: • Plant A: $120,000 • Plant B: $350,000 Both assets are depreciated on a straight-line basis. Plant A has an estimated useful life of 10 years, and an estimated residual value of $20,000. Plant B has an estimated useful life of 5 years, and an estimated residual value of $0. At 30 June 2014, Jacky Ltd decides to use the revaluation model for the plant. The fair value of Plant A is $80,000, and the fair value of Plant B is $300,000. The remaining useful life and residual value of each item has not changed. At 30 June 2015, the fair value of Plant A is $75,000, and the fair value of Plant B is $200,000. Assume a tax rate of 30%. Required: Prepare journal entries for Jacky Ltd at 1 July 2013, 30 June 2014 and 30 June 2015 to record the above. Show narrations and all relevant workings. Question 5 a) Outline the different types of liquidations. b) Explain the meaning of the term ‘unrealised profits’ in relation to the transfer of assets within a group of entities. c) Provide a definition of ‘residual value’ of an asset, and explain the nature of residual value.

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